There are 2 items that go into knowing the right property value range you should focus on for your household:
- The down payment needed to avoid PMI (Private Mortgage Insurance) and to secure a reasonable monthly payment
- The monthly payment you will have to pay (including taxes and homeowner's insurance!).
You can see that these two points are related. Your mortgage broker may say you are approved to borrow up to a very high number, but that is RARELY the right amount to borrow because it usually doesn't make sense both from a down payment and monthly payment perspective.
Let’s do an example. Say you find your dream house and it costs $500k. Your mortgage broker says you are approved for a mortgage up to $450k and you have $50k of savings. That all seems to work, but you have to do the full math to make sure, as shown below:
|Buying a Property||Amount|
|Mortgage (3% for 30 yrs)||$450,000|
|Principal & Interest||$1,897|
|All in Total Housing||$2,557|
You can afford the down payment and you’ve been approved for the mortgage, but a housing payment of $2557/month is too much for your cash flow. What if you can only handle a $1800/month housing payment? You would need to wait and save more to be able to put down 20% ($100k in this case) and avoid PMI. With a larger down payment, your monthly payment would also be significantly less. Alternatively, you could do some calculations to find out what price of house (with the down payment you have now) would give you a monthly payment that you could handle. In the end, it'll be a judgment you have to make if you want to wait for the nicer home or compromise some things on the wishlist to own property now.
Here you can see that you need to balance down payments AND monthly payments to make sure you do not jeopardize your household financial wellbeing by being “house poor” and not being able to do anything else all month because you have to pay the mortgage. Remember, when you buy a property, you need to balance both. Otherwise, you'll find yourself not being able to afford other important expenses!